Sweetmotion Limited v The Commissioners for HMRC [2026] UKFTT 657 (TC)

[2026] UKFTT 00657 (TC)

Case No TC 09871

FIRST-TIER TRIBUNAL

TAX CHAMBER

Hearing Heard on: 16 –20 March 2026

Date Judgment date: 05 May 2026

Taylor House, London

Appeal reference: TC/2023/01091

VAT – Kittel – fast moving consumer goods – knew or should have known – company penalty – mitigation – appeal allowed in part

Before

TRIBUNAL JUDGE

Duncan McBride

Between

Sweetmotion LimitedAppellant

THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondent

The appellant appeared in person for Appellant

Ms Joanna Vicary of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for Respondents

DECISION

Introduction

[1]This is an appeal by Sweetmotion Limited (“Sweetmotion”) in relation to decisions made by HMRC:(1) on 6 October 2022 to refuse Sweetmotion’s entitlement to the right to deduct input tax in the sum of £1,288,151 in VAT periods 03/20 to 06/21 on the basis of the principle established in Kittel v Belgium, Belgium v Recolta Recycling SPRL (Joined cases C-439/04 and C-440/04)

[2008] STC 1537

(“Kittel”) (the “Kittel Decision”); and

(2) on 11 November 2022 to issue Sweetmotion with a penalty under section 69C of the Value Added Tax Act 1994 (“VATA 1994”) in the sum of £386,445.30 (the “Company Penalty”).

[2]These decisions were upheld by a review dated 10 February 2023.

[3]Sweetmotion was professionally represented until about two weeks before the hearing. While represented Sweetmotion lodged a Fairford Response to the effect that, of the Kittel criteria, only knowledge is challenged. Fraudulent tax loss and connection are admitted; as is the fact that the denied transactions were part of an orchestrated scheme to defraud HMRC.

[4]The quantum of input tax denied for each of the periods in dispute is as follows: VAT period Input tax denied 03/20 £206,661 06/20 £192,375 09/20 £369,558 12/20 £431,921 03/21 £72,625 06/21 £15,011 Total £1,288,151

[5]At all relevant time the sole director of Sweetmotion was Mr Paul Jenkins. On 13 December 2022, HMRC issued Mr Jenkins with a penalty under s. 69D VATA) (the “PLN”) in the sum of £386,445.30. However, this has not been appealed. It is common ground that this was an accidental omission. It is also common ground that due to the mechanics of VATA 1994 the PLN will stand or fall with the Company Penalty: and any mitigation of the Company Penalty will reduce the quantum of the PLN.

[6]The denial of input tax relates to transactions with four companies, who were between them the sole immediate suppliers of Sweetmotion during all relevant periods, being:(1) Peralto Limited (“Peralto”);

(2) CTADS Limited (“CTADS”);

(3) Kensington & Chelsea Associates Limited (“KCA”); and

(4) Suited to Business Limited (“STB”). Law The right to deduct input tax

Law

[7]The right of a taxable person to deduct input tax is contained within sections 24-29 of VATA 1994. In particular:(1) section 25 of VATA 1994 requires a taxable person to account for and pay any VAT on the supplies of goods and services which he makes and entitles him to a credit of so much of his input tax as is allowable under section 26: see section 25(2); and

(2) section 26 of VATA 1994 gives effect to Article 168 of EC Council Directive 2006/112 (the “VAT Directive”) and allows the taxable person credit in each accounting period for so much of the input tax for that period as is attributable to supplies made by them in the course or furtherance of his business: see section 26(2).

[8]Those provisions reflect and transpose the corresponding European Community laws contained within Articles 167 and 168 of the VAT Directive.

The loss of the right to deduct input tax

[9]The right to deduct input tax will be lost where a taxable person “knew or should have known” that his transaction was connected with the fraudulent evasion of VAT. This is a test that was originally laid down by the Court of Justice of the European Communities (“CJEU”) in Kittel. There the CJEU stated:

“56. In the same way, a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods. 57. That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice. 58. In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them. 59. Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of ‘supply of goods effected by a taxable person acting as such’ and ‘economic activity’. … 61. By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT.”

[10]The Kittel Principle was elaborated on by Moses LJ sitting in the Court of Appeal in Mobilx Ltd v HMRC

[2010] EWCA Civ 517

;

[2010] STC 1436

(“Mobilx”) where he stated:

“43. A person who has no intention of undertaking an economic activity, but pretends to do so in order to make off with the tax he has received on making a supply, either by disappearing or hijacking a taxable person’s VAT identity, does not meet the objective criteria which form the basis of those concepts which limit the scope of VAT and the right to deduct (see Halifax at [59] and Kittel at [53]). A taxable person who knows or should have known that the transaction which he is undertaking is connected with fraudulent evasion of VAT is to be regarded as a participant and, equally, fails to meet the objective criteria which determine the scope of the right to deduct. … 52. If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel. A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises.”

[11]In Mobilx the Court of Appeal went on to sound a note of caution in relation to attempts to improve upon the principle laid down in Kittel:

“59. The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who ‘should have known’. Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel.”

[12]In relation to the phrase “the only reasonable explanation” it is important to note, as confirmed by Proudman J. sitting in the Upper Tribunal in the case of GSM Export (UK) Ltd and another v HMRC

[2014] UKUT 0529 (TCC)

, that Mobilx does not purport to change the test in Kittel:

“19. However, Mobilx does not purport to change the test in Kittel’s case. The requirement as to the taxpayer’s state of mind squarely remains ‘knew or should have known’. The reference to ‘the only reasonable explanation’ is merely a way in which HMRC can demonstrate the extent of the taxpayers’ knowledge, that is to say, that he knew, or should have known, that the transaction was connected with fraud, as opposed to merely knowingly running some sort of risk that there might be such a connection.”

[13]The Court of Appeal in Mobilx (at [83]) then affirmed guidance on the treatment of circumstantial evidence in cases of VAT fraud. In doing so the Court of Appeal quoted Christopher Clarke J. in Red 12 Ltd v HMRC

[2009] EWHC 2563

;

[2010] STC 589

(“Red 12”), who had said:

“109. Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and ‘similar fact’ evidence. That is not to alter its character by reference to earlier or later transactions but to discern it. 110. To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. A sale of 1,000 mobile telephones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware. If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax. The same transaction may be viewed differently if it is the fourth in line of a chain of transactions all of which have identical percentage mark ups, made by a trader who has practically no capital as part of a huge and unexplained turnover with no left over stock, and mirrored by over 40 other similar chains in all of which the taxpayer has participated and in each of which there has been a defaulting trader. A tribunal could legitimately think it unlikely that the fact that all 46 of the transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence. Similarly, three suspicious involvements may pale into insignificance if the trader has been obviously honest in thousands. 111. Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them.”

[14]Further, in AC (Wholesale) Ltd v HMRC

[2017] UKUT 191 (TCC)

, the Upper Tribunal considered Mobilx concluding that the “only reasonable explanation” test is simply one way of showing that a person should have known that transactions were connected to fraud. On this, the Upper Tribunal went on to state that:

“29. It is, to us, inconceivable that Moses LJ’s example of an application of part of that test, the ‘no other reasonable explanation’, would lead to the test becoming more complicated and more difficult to apply in practice. That, in our view, would be the consequence of applying the interpretation urged upon us by Mr Brown [Counsel for taxpayer]. In effect, HMRC would be required to devote time and resources to considering what possible reasonable explanations, other than a connection with fraud, might be put forward by an appellant and then adduce evidence and argument to counter them even where the appellant has not sought to rely on such explanations. That would be an unreasonable and unjustified evidential burden on HMRC. Accordingly, we do not consider that HMRC are required to eliminate all possible reasonable explanations other than fraud before the FTT is entitled to conclude that the appellant should have known that the transactions were connected to fraud. 30. Of course, we accept (as, we understand, does HMRC) that where the appellant asserts that there is an explanation (or several explanations) for the circumstances of a transaction other than a connection with fraud then it may be necessary for HMRC to show that the only reasonable explanation was fraud. As is clear from Davis & Dann, the FTT’s task in such a case is to have regard to all the circumstances, both individually and cumulatively, and then decide whether HMRC have proved that the appellant should have known of the connection with fraud. In assessing the overall picture, the FTT may consider whether the only reasonable conclusion was that the purchases were connected with fraud. Whether the circumstances of the transactions can reasonably be regarded as having an explanation other than a connection with fraud or the existence of such a connection is the only reasonable explanation is a question of fact and evaluation that must be decided on the evidence in the particular case. It does not make the elimination of all possible explanations the test which remains, simply, did the person claiming the right to deduct input tax know that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT or should he have known of such a connection.”

[15]A taxpayer does not need to know specific details of the fraud being perpetuated. In Fonecomp Ltd v HMRC

[2015] EWCA Civ 39

;

[2015] STC 2254

the Court of Appeal (Arden LJ) said:

“51. … the holding of Moses LJ does not mean that the trader has to have the means of knowing how the fraud that actually took place occurred. He has simply to know, or have the means of knowing, that fraud has occurred, or will occur, at some point in some transaction to which his transaction is connected. The participant does not need to know how the fraud was carried out in order to have this knowledge. This is apparent from paras [56] and [61] of Kittel cited above. Paragraph [61] of Kittel formulates the requirement of knowledge as knowledge on the part of the trader that ‘by his purchase he was participating in a transaction connected with fraudulent evasion of VAT’. It follows that the trader does not need to know the specific details of the fraud.”

[16]It is dishonest for a person deliberately to shut their eyes to facts which they would prefer not to know. If he or she does so, they are taken to have actual knowledge of the facts to which they shut their eyes. See, for example, Beigebell Ltd (No.2) v HMRC

[2023] UKFTT 363 (TC)

and Cavendish Ships Stores v HMRC

[2020] UKFTT 257 (TC)

. Such knowledge has been described as “Nelsonian” or “blind-eye” knowledge”: see judgment of Lord Scott in Manifest Shipping Company Ltd v Uni-Polaris Shipping Company Ltd and others

[2001] UKHL 1

;

[2003] 1 AC 469

“112. ‘Blind-eye’ knowledge approximates to knowledge. Nelson at the battle of Copenhagen made a deliberate decision to place the telescope to his blind eye in order to avoid seeing what he knew he would see if he placed it to his good eye. It is, I think, common ground – and if it is not, it should be – that an imputation of blind-eye knowledge requires an amalgam of suspicion that certain facts may exist and a decision to refrain from taking any step to confirm their existence. Lord Blackburn in Jones v Gordon (1877) 2 App Cas 616, 629 distinguished a person who was ‘honestly blundering and careless’ from a person who ‘refrained from asking questions, not because he was an honest blunderer or a stupid man, but because he thought in his own secret mind – I suspect there is something wrong, and if I ask questions and make farther inquiry, it will no longer be my suspecting it, but my knowing it, and then I shall not be able to recover’. Lord Blackburn added ‘I think that is dishonesty’.”

Approach to assessment of circumstantial evidence

[17]In Mobilx Moses LJ stated:

“81. It is plain that if HMRC wishes to assert that a trader’s state of knowledge was such that his purchase is outwith the scope of the right to deduct it must prove that assertion… 82. But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant. … Tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud. The danger in focusing on the question of due diligence is that it may deflect a Tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was.”

[18]In Mahagében kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Főigazgatósága; Dávid v Nemzeti Adó- és Vámhivatal Észak-alföldi Regionális Adó Főigazgatósága (Joined cases C-80/11 and C-142/11)

[2012] STC 1934

the CJEU said the following with regard to due diligence:

“60. It is true that, when there are indications pointing to an infringement or fraud, a reasonable trader could, depending on the circumstances of the case, be obliged to make enquiries about another trader from whom he intends to purchase goods or services in order to ascertain the latter’s trustworthiness. 61. However, the tax authority cannot, as a general rule, require the taxable person wishing to exercise the right to deduct VAT, first, to ensure that the issuer of the invoice relating to the goods and services in respect of which the exercise of that right to deduct is sought has the capacity of a taxable person, that he was in possession of the goods at issue and was in a position to supply them and that he has satisfied his obligations as regards declaration and payment of VAT, in order to be satisfied that there are no irregularities or fraud at the level of the traders operating at an earlier stage of the transaction or, second, to be in possession of documents in that regard. 62. It is, in principle, for the tax authorities to carry out the necessary inspections of taxable persons in order to detect VAT irregularities and fraud as well as to impose penalties on the taxable person who has committed those irregularities or fraud. 63. According to the case law of the court, member states are required to check taxable persons’ returns, accounts and other relevant documents (see EC Commission v Italy (Case C-132/06) [2008] ECR I-5457, para 37, and Dyrektor Izby Skarbowej w Biaymstoku v Profaktor Kulesza, Frankowski, Jówiak, Orowski (Case C-188/09) [2010] ECR I-7639, para 21). 64. To that end, Directive 2006/112 imposes, in particular in art 242, an obligation on every taxable person to keep accounts in sufficient detail for VAT to be applied and its application checked by the tax authorities. In order to facilitate the performance of that task, arts 245 and 249 of that directive provide for the right of the competent authorities to access the invoices which the taxable person is obliged to store under art 244 of that directive. 65. It follows that, by imposing on taxable persons, in view of the risk that the right to deduct may be refused, the measures listed in para 61 of the present judgment, the tax authority would, contrary to those provisions, be transferring its own investigative tasks to taxable persons.”

[19]The case law indicates that it is necessary to guard against over-compartmentalisation of relevant factors, and to stand back and consider the totality of the evidence: see Davis & Dann Ltd v HMRC

[2016] EWCA Civ 142

[2016] STC 1236

(“Davis & Dann”) and CCA Distribution Ltd v HMRC

[2017] EWCA Civ 1899

;

[2018] STC 206

(“CCA Distribution”).

[20]In considering circumstantial evidence, the Tribunal should take care not to restrict itself to considering each piece of evidence alone and in isolation from the others. This is because circumstantial evidence is not a chain, where a break in one link breaks the chain, but is a cord: one strand of the cord might be insufficient to sustain the weight, but three strands together might be sufficient: see R v Exall (1866) 4 F&F 922, per Pollock CB, cited with approval by the Upper Tribunal CCA Distribution at [91]. Accordingly, the whole can end up stronger than the individual parts: see the decision of Judge Christopher McNall in Wholesale Distribution Ltd v HMRC

[2024] UKFTT 00514 (TC)

at [49]

[21]Further, it is necessary to consider individual transactions in their context, including drawing inferences from a pattern of transactions, and to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them: see Red 12 at [109] to [111]. In effect, as a facet of the guidance given in Red 12, it is necessary to guard against over-compartmentalisation of relevant factors, and to stand back and consider the totality of the evidence: Davis & Dann and CCA Distribution.

Burden and standard of proof

[22]Where HMRC rely on the Kittel Principle, it is for HMRC to prove that each element of the test set down by the CJEU is satisfied (see Mobilx at [8]), namely:(1) there was fraudulent evasion of VAT;

(2) the appellant’s purchases on which input tax have been denied were connected with that fraudulent evasion of VAT; and

(3) the appellant knew or should have known that its purchases were connected with fraudulent evasion of VAT.

[23]As the CJEU underscored at paragraph [47] of Kittel, the right to deduct is “an integral part of the VAT scheme [which] in principle may not be limited”. Accordingly, the Tribunal must, before allowing that right to be interfered with, be satisfied that HMRC have proved each element of the Kittel test in relation to each purchase that they seek to deny input tax on.

[24]It is not enough for HMRC to prove that the appellant’s purchases might have been connected with fraudulent evasion of VAT: see Hira Company Ltd v HMRC

[2011] UKFTT 450 (TC)

at [111], per Judge Poole. Rather, HMRC have to prove, on the balance of probabilities, that the appellant’s purchases were connected with fraudulent evasion of VAT.

[25]Similarly, it is not enough for HMRC to prove that the appellant knew or should have known that its purchases might be connected with fraudulent evasion of VAT, were probably connected with fraud or were likely connected with fraud. Rather, HMRC have to prove, on the balance of probabilities, that the appellant knew or should have known that its purchases were connected with the fraudulent evasion of VAT.

[26]The standard of proof is the civil standard of the balance of probabilities. As confirmed by Lord Hoffman in Re B [2008] UKHL; 35

[2009] 1 AC 11

“[13] I think the time has come to say, once and for all, that there is only one civil standard of proof, and that is proof that the fact in issue more probably occurred than not. … [70] …[the civil standard of proof] is the simple balance of probabilities, neither more nor less. Neither the seriousness of the allegation nor the seriousness of the consequences should make any difference to the standard of proof to be applied in determining the facts. The inherent probabilities are simply something to be taken into account, where relevant, in deciding where the truth lies.”

Company penalty

[27]So far as is relevant, s 69C VATA 1994 specifies: “69C Transactions connected with VAT fraud(1) A person (T) is liable to a penalty where— (a) T has entered into a transaction involving the making of a supply by or to T (‘the transaction’), and (b) conditions A to C are satisfied.

(2) Condition A is that the transaction was connected with the fraudulent evasion of VAT by another person (whether occurring before or after T entered into the transaction).

(3) Condition B is that T knew or should have known that the transaction was connected with the fraudulent evasion of VAT by another person.

(4) Condition C is that HMRC have issued a decision (‘the denial decision’) in relation to the supply which— (a) prevents T from exercising or relying on a VAT right in relation to the supply, (b) is based on the facts which satisfy conditions A and B in relation to the transaction, and (c) applies a relevant principle of EU case law (whether or not in circumstances that are the same as the circumstances in which any relevant case was decided by the European Court of Justice).

(5) In this section ‘VAT right’ includes the right to deduct input tax, the right to apply a zero rate to international supplies and any other right connected with VAT in relation to a supply.

(6) The relevant principles of EU case law for the purposes of this section are the principles established by the European Court of Justice in the following cases— (a) joined Cases C-439/04 and C-440/04 Axel Kittel v Belgian State; Belgium v Recolta Recycling (denial of right to deduct input tax), and (b) … as developed or extended by that Court in any other cases relating to the denial or refusal of a VAT right in order to prevent abuses of the VAT system which were decided before the coming into force of section 42 of TCTA 2018. (7)The penalty payable under this section is 30% of the potential lost VAT. (8) The potential lost VAT is— (a) the additional VAT which becomes payable by T as a result of the denial decision, (b) the VAT which is not repaid to T as a result of that decision, or (c) in a case where as a result of that decision VAT is not repaid to T and additional VAT becomes payable by T, the aggregate of the VAT that is not repaid and the additional VAT. (9) Where T is liable to a penalty under this section the Commissioners may assess the amount of the penalty and notify it to T accordingly. (10) No assessment of a penalty under this section may be made more than two years after the denial decision is issued. (11) The assessment of a penalty under this section may be made immediately after the denial decision is made (and notice of the assessment may be given to T in the same document as the notice of the decision). …” (a) T has entered into a transaction involving the making of a supply by or to T (‘the transaction’), and (b) conditions A to C are satisfied. (a) prevents T from exercising or relying on a VAT right in relation to the supply, (b) is based on the facts which satisfy conditions A and B in relation to the transaction, and (c) applies a relevant principle of EU case law (whether or not in circumstances that are the same as the circumstances in which any relevant case was decided by the European Court of Justice). (a) joined Cases C-439/04 and C-440/04 Axel Kittel v Belgian State; Belgium v Recolta Recycling (denial of right to deduct input tax), and (b) … (a) the additional VAT which becomes payable by T as a result of the denial decision, (b) the VAT which is not repaid to T as a result of that decision, or (c) in a case where as a result of that decision VAT is not repaid to T and additional VAT becomes payable by T, the aggregate of the VAT that is not repaid and the additional VAT.

[28]The Company Penalty may be mitigated under section 70 VATA 1994 which provides: “70 Mitigation of penalties under sections 60, 63, 64, 67, 69A and 69C(1) Where a person is liable to a penalty under section 60, 63, 64, 67, 69A or 69C or under paragraph 10 of Schedule 11A, the Commissioners or, on appeal, a tribunal may reduce the penalty to such amount (including nil) as they think proper.

(2) In the case of a penalty reduced by the Commissioners under subsection (1) above, a tribunal, on an appeal relating to the penalty, may cancel the whole or any part of the reduction made by the Commissioners.

(3) None of the matters specified in subsection (4) below shall be matters which the Commissioners or any tribunal shall be entitled to take into account in exercising their powers under this section.

(4) Those matters are— (a) the insufficiency of the funds available to any person for paying any VAT due or for paying the amount of the penalty; (b) the fact that there has, in the case in question or in that case taken with any other cases, been no or no significant loss of VAT; (c) the fact that the person liable to the penalty or a person acting on his behalf has acted in good faith.

(5) In the application of subsections (3) and (4) in relation to a penalty under section 69C, subsection (4) has effect with the omission of paragraphs (b) and (c).” (a) the insufficiency of the funds available to any person for paying any VAT due or for paying the amount of the penalty; (b) the fact that there has, in the case in question or in that case taken with any other cases, been no or no significant loss of VAT; (c) the fact that the person liable to the penalty or a person acting on his behalf has acted in good faith.

[29]It is common ground that, as the penalty is under section 69C, the only matter that statute prohibits us from considering is the insufficiency of the funds available to any person for paying any VAT due or for paying the amount of the penalty.

Hearing

[30]We have considered:(1) an appellant’s skeleton argument (6 pages) and written closing submissions from the appellant (15 pages);

(2) HMRC’s skeleton argument (37 pages), updated to include final submissions (50 pages);

(3) the hearing bundle (2,828 pages);

(4) 2020 banks statement of Sweetmotion (15 pages, including cover email);

(5) a “Defaulter Summary” prepared by HMRC (1 page); and

(6) the witness statement of Philip Gaffney (1 page).

[31]We heard live witness evidence from:(1) Officer Ian Joiner;

(2) Officer Loraine McNally;

(3) Mr Jenkins; and

(4) Mr Charles Goldstein, Sweetmotion’s accountant.

[32]We found both HMRC officers to be honest and straightforward witnesses. They conceded facts that were adverse to HMRC’s case, for example that it was irregular both that no veto letters were sent and that HMRC did not alert Sweetmotion to the fact that their suppliers had been deregistered sooner. Officer Joiner also admitted that monthly checks of registration would not normally be necessary, as a taxpayer could rely on HMRC sending a veto letter if a supplier was deregistered.

[33]We note that Officer McNally was not the officer in the case during the investigation. She gave her evidence since the relevant officers had left HMRC. As such, her evidence carries less probative value than if she had been involved in the investigations.

[34]We found Mr Jenkins to be an honest but unreliable witness. The relevant events took place over five years ago, and so it is perhaps natural that some of his recollections were inaccurate. For example he stated that he ceased to have access to the Sweetmotion email since 2021, but the documentary evidence showed him using that as late as December 2022. There were also many questions that Mr Jenkins stated he simply could not remember, for example whether he had contacted KCA or they contacted him; or who at the defaulter companies he spoke to.

[35]We accept the testimony of Mr Goldstein. He gave straightforward answers to the questions he was asked. He was clear about things that were outside his knowledge: for example he was not involved in due diligence. Likewise, he was clear when he was unsure in his answer to a question.

HMRC’s case

[36]HMRC submit that Sweetmotion either knew, or at the very least should have known, that the transactions in issue were connected with the fraudulent evasion of VAT. The starting point of HMRC’s case is that all four suppliers used by Sweetmotion during the relevant periods were subsequently deregistered as fraudulent defaulters, and that Sweetmotion accepts that the denied transactions formed part of an orchestrated scheme to defraud HMRC. HMRC contend that it is inherently improbable that a trader embarking on legitimate commercial activity would, by coincidence alone, trade exclusively and consecutively with four defaulting suppliers. In HMRC’s submission, this pattern of trading is consistent only with contrived and pre‑arranged dealings, and is inconsistent with ordinary commercial behaviour.

[37]HMRC place weight on the rapidity with which Sweetmotion engaged in high‑value trading with suppliers whom Mr Jenkins had never met and about whom he had undertaken only superficial checks. In respect of Peralto and STB, HMRC note that Sweetmotion traded within hours of receiving unsolicited introductory emails, and in each case entered into transactions of significant value on the same day. HMRC say such immediacy is commercially inexplicable and supports the inference of pre‑planned trading, rather than arms‑length market dealings. HMRC also rely on the fact that Sweetmotion was never involved in the physical movement of the goods, that suppliers delivered directly to Sweetmotion’s customers, and that Sweetmotion did not meaningfully verify transport arrangements, insurance, or the identity and capacity of the supposed suppliers. HMRC submit that Sweetmotion’s role in the chains was commercially artificial and indicative of contrivance.

[38]A major element of HMRC’s case concerns the due diligence undertaken by Mr Jenkins. HMRC accept that undue emphasis should not be placed on due diligence in isolation, but rely on the inadequacy of the steps taken as part of the broader evidential picture – which also includes lack of documentary evidence. HMRC point to features which, in their submission, were obvious and should have prompted a reasonable trader to identify that something was seriously wrong. Examples include the fact that CTADS had filed dormant accounts for nearly a decade, that Peralto and STB were newly incorporated and had not filed any accounts, and that STB’s and CTADS’ VAT certificates contained spelling errors and formatting anomalies. HMRC submit that these matters would have been readily apparent from the most basic inquiry and ought to have been noticed. They argue that Mr Jenkins’ failure to observe such matters cannot be explained by mere inexperience or lack of administrative skill, but instead demonstrates that he either understood the true nature of the transactions or deliberately chose not to probe discrepancies, so as to avoid confirming what he suspected. HMRC therefore invite the Tribunal to infer actual, “blind‑eye” knowledge.

[39]HMRC attach particular importance to the third‑party payments made to ST Bookly in relation to CTADS. Mr Jenkins initially told HMRC that only two or three such payments had been made, but bank evidence showed thirty‑four payments totalling over £676,000. HMRC submit that the scale of the payments, the fact that they were made to an entirely unrelated foreign company, and the fact that they commenced around the time CTADS’s was deregistered, all point towards Sweetmotion’s knowledge of the fraudulent character of the transactions. HMRC argue that Mr Jenkins’ inability to recall the payments, made only weeks earlier, is not credible. They submit that the understatement was not a momentary lapse but an attempt to deflect scrutiny from a feature of the trading which he knew would raise concerns.

[40]HMRC also rely on the dramatic and unexplained increase in Sweetmotion’s turnover from early 2020. They note that Sweetmotion estimated an annual turnover of £100,000 when registering for VAT, and had modest historic returns, yet within months was declaring purchases exceeding £1 million per quarter. HMRC contend that such a sudden and substantial rise, particularly in a sector where Mr Jenkins had little recent trading experience, is itself a hallmark of contrived supply‑chain fraud. They argue that a reasonable trader would have recognised the implausibility of obtaining such volumes, from unknown and newly formed suppliers, at the margins Sweetmotion achieved, without questioning how these suppliers could source goods at such scale and speed.

[41]Turning to the education provided to Mr Jenkins, HMRC acknowledge that much of the formal guidance was provided after many of the denied transactions had taken place. However, HMRC emphasise that by 18 January 2021 Mr Jenkins had been expressly directed to Notice 726 and to HMRC’s guidance on missing trader fraud. In that meeting, HMRC drew his attention to features of fraudulent supply chains, including rapid increases in turnover, new companies with no trading history, low margins, lack of insurance, and unusual payment arrangements. HMRC note that Mr Jenkins did not read the due diligence guidance despite being provided with links and despite acknowledging that he found the information “frightening”. HMRC submit that this failure to engage with guidance – coming at a point when he was actively trading with STB, itself deregistered shortly thereafter – strongly suggests that he was choosing not to enquire lest he confirm what he already suspected. HMRC therefore say this is evidence of actual, blind‑eye knowledge.

[42]In the alternative, HMRC argue that even if the Tribunal is not satisfied that Mr Jenkins had actual knowledge, he unquestionably should have known that the transactions were connected with fraud. They say that the combination of repeated red flags, unexplained trading patterns, anomalies in documentation, implausible commercial arrangements, third‑party payments, and the absence of any credible explanation for how four independent suppliers could each independently be fraudulent, is sufficient to satisfy the objective limb of the Kittel test. In HMRC’s submission, the only reasonable explanation for the circumstances surrounding Sweetmotion’s trading is that the transactions were connected with the fraudulent evasion of VAT and that Mr Jenkins should have appreciated that fact.

The Appellant’s case

[43]Sweetmotion submits that it neither knew nor should have known that its transactions were connected with the fraudulent evasion of VAT. Its case rests on four interconnected themes: the reasonableness of its due diligence, the commercial reality of its trading, the absence of any motive to engage in wrongdoing, and the manner in which HMRC conducted and communicated its investigation.

[44]Sweetmotion emphasises that its back-to-back trading began at the outset of the COVID‑19 pandemic, when the director, Mr Jenkins, was simultaneously undertaking PAYE work. He says the shift into trading FMCG goods arose organically through industry contacts, including a former colleague. Sweetmotion contends that it was well‑placed to operate during lockdown conditions: it had minimal overheads, direct access to wholesale contacts, and a director with three decades of practical experience within the trade. It says the model of back‑to‑back trading with direct delivery from supplier to customer is commonplace in the FMCG sector, where speed of movement and small margins are normal commercial features. It maintains that all goods were physically delivered, paid for, inspected by customers upon receipt, and supported by delivery notes where issues arose.

[45]Sweetmotion argues that it conducted reasonable and proportionate due diligence. The primary purpose of due diligence (until they received education from HMRC on VAT fraud) was seen as minimising financial risk – although that was heavily mitigated by the back-to-back business model. It says that, on Mr Jenkins’ accountant’s advice, the company maintained HMRC‑compliant accounting systems, gave full bank access to its accountant, and declared VAT and corporation tax accurately and on time. As to suppliers, Sweetmotion states that it gathered introduction letters, passports or driving licences, utility bills, VAT registration certificates. It also states that it verified that each supplier was active and VAT‑registered at the point of first trading, and that any suppliers unable or unwilling to supply documentation were not engaged. Sweetmotion submits that these steps met, and in some respects exceeded, what due diligence requires, particularly in the context of COVID‑19 restrictions. It also maintains that many of the red flags identified retrospectively by HMRC were not matters it had been told to look for, nor matters that a reasonable trader would necessarily identify at the time.

[46]Sweetmotion rejects HMRC’s suggestion that any of the trading was pre‑arranged or contrived. It says that rapid turnaround deals are inherent in the FMCG market, where wholesalers buy and sell full truckloads within hours if the goods are available and the price is competitive. It disputes that contact from suppliers was “out of the blue”, stating that introductions generally arose from industry networks, trade exhibitions, or conversations that took place days before any email was sent. Sweetmotion argues it had no reason to doubt the legitimacy of suppliers, all of whom appeared active on public registries at the time of first trading, and some of whom operated from premises with which Mr Jenkins was already familiar.

[47]Sweetmotion places considerable emphasis on the absence of any financial motive to engage in fraud. It describes its business model as low‑margin and high‑volume. It points out that all payments were made by traceable UK bank transfers; and that it derived no abnormal profits. It says that this is wholly inconsistent with the behaviour of a participant in VAT fraud, and that HMRC has not identified a rational explanation why a small family‑run company, operating from the director’s home address, would knowingly expose itself to criminal liability. Sweetmotion also points to Mr Jenkins’ personal background – long‑term community ties, a stable family life, decades in the industry without any allegation of wrongdoing, and a strong emphasis on protecting his family’s reputation – as inconsistent with deliberate participation in fraud.

[48]A significant theme of Sweetmotion’s case concerns HMRC’s conduct. The company says that HMRC repeatedly described discussions as informal, told Mr Jenkins he did not need legal representation, and did not indicate that information provided in meetings would later be relied upon as evidence of wrongdoing. Sweetmotion states that it repeatedly asked HMRC if it had done anything wrong and was told there was no immediate cause for concern. It further submits that HMRC did not inform it at the time when any supplier became deregistered, despite knowing who its suppliers were by early March 2021. Sweetmotion argues that HMRC were under an obligation to alert it to such deregistration promptly. Had HMRC done so, Sweetmotion says it would have immediately ceased trading with the supplier concerned. Instead, the company heard nothing until August 2021, months after the last transaction with a defaulting trader. It therefore says that it should not be criticised for continuing to trade in ignorance of matters known to HMRC but not communicated to it. It also argues that HMRC’s failure to send veto letters, combined with their stated intention to “help” and “advise”, created a false sense of regularity in the supply chains.

[49]Sweetmotion also relies on the prejudice caused by the passage of time. It says the events took place between 2019 and 2021, during the exceptional conditions of the pandemic, and that nearly five years have since elapsed. It submits that HMRC’s delays mean contemporaneous communications, informal notes, and other records can no longer be recovered, including emails lost when the company’s domain name lapsed. It argues that it is unfair to draw adverse inferences from an absence of documentation or from imperfect recollection when HMRC itself discouraged formalisation of the process and did not warn the company of the seriousness of the investigation at the time.

[50]Finally, Sweetmotion disputes HMRC’s characterisation of the third‑party payments. It says that the payments were made only after a supplier reported banking difficulties, and only once Mr Jenkins insisted on receiving a signed letter authorising payment to an alternative account. It argues that HMRC’s reliance on initial misestimation of the number of payments is misplaced; Mr Jenkins says he answered informally and without checking records, believing the conversation to be advisory rather than evidential. Sweetmotion maintains that all bank statements were voluntarily disclosed, that nothing was concealed, and that the payments were consistent with normal commercial pressure in a fast‑moving market, not evidence of knowledge of fraud.

[51]For these reasons, Sweetmotion submits that it did not know, and could not reasonably have known, that its transactions were connected with fraudulent evasion of VAT, and that HMRC has not discharged the burden of proof required under the Kittel principle.

Findings of Fact

[52]Mr Jenkins has a longstanding connection to the confectionary trade. He grew up in the business as his father was also in the confectionary trade. He has many contacts with large retailers and wholesalers.

[53]Sweetmotion Limited was incorporated on 25 October 2011. The company’s nature of business is listed on Companies House as “wholesale of sugar and chocolate and sugar confectionery”. Mr Jenkins has been the sole director since incorporation.

[54]Sweetmotion has been registered for VAT since 1 March 2013. When applying for registration on form VAT1 it stated its business activities to be the “wholesale of confectionary products”. It was deregistered with effect from 9 December 2021 on the basis that it was no-longer trading.

[55]Immediately prior to February 2020 the business of Sweetmotion changed from consultative sales management to back-to-back sales of whole truck loads – Sweetmotion’s suppliers would deliver directly to Sweetmotion’s customers. This resulted in a rapid increase in turnover. In the periods 12/18 to 12/19 the sales/outputs of Sweetmotion had not exceeded £19,000. In the subsequent periods the inputs/outputs were as follows: VAT Period Purchases/Inputs Sales/Outputs 03/20 £1,043,292 £1,041,774 06/20 £987,764 £995,156 09/20 £1,839,756 £1,880,354 12/20 £2,202,308 £2,217,030 03/21 £398,181 £387,130 06/21 £100,785 £92,784 09/21 £4,705

£0

[56]The supplies which have been denied are summarised in the following table: Defaulter Periods traded with Sweetmotion First transaction Last transaction VAT Deregistered Quantum (and number) of trades post-deregistration Peralto 03/20 06/20 14 February 2020

17 June 2020

21 February 2020

£104,372 (30) CTADS 06/20 09/20 12/20 27 April 2020

9 December 2020

24 October 2020

£96,598 (6) KCA 06/20 12 May 2020

29 May 2020

26 August 2020 N/A STB 12/20 03/12 06/21 1 December 2020

19 April 2021

22 December 2020

£204,390 (60)

[57]The supplies in question are predominantly soft drinks. There are some supplies of(i) confectionary, such as Dime bars;

(ii) personal hygiene products, such as Gillette and Dove soap

(iii) general household products, such as bin bags. The supplies generally relate to full-truckload supplies of a given commodity. Many of the supplies are “grey-market”, being produced outside the UK and not intended to be marketed to consumers in the UK.

[58]Mr Jenkins kept minimal records. Trades would be entered into his diary, which has not been produced in evidence.

[59]Mr Jenkins would generally add a markup of either 10p or 5p per crate on a transaction. He used his knowledge of the business to determine which to add. Where he was unsure what margin to add he would use his best knowledge and then approach other customers if those he first approached were not willing to purchase at that price offering a different, reduced, margin. He described this as a “spit ball” approach.

[60]There are several issues with the invoices prepared by Mr Jenkins. He prepared the invoices himself and clearly did not give much thought to them. Indeed, the gist of his explanation was that he did not have much skill or interest in paperwork and would just do deals on the phone.

[61]For example on 8 December 2020 he invoices a customer £40,804.40 for 3,458 12x2 cases of Dove soap. On 14 December he invoices the same customer the same amount for 3,458 12x4 cases of Dove soap. Commercially this makes no sense. We accept his explanation that the same number of bars of soap will have been provided in each order. {943-944}

[62]Other discrepancies include Euro symbols being used for GBP amounts and occasions where the sales invoice (to Sweetmotion’s customer) predates the purchase invoice by one day.

[63]Invoices were emailed to Mr Jenkins by his suppliers. They were emailed to him at a Sweetmotion email address that he no longer has access to, due to failing to pay for the domain name. Delivery notes were also sent to Mr Jenkins by suppliers, but have not been retained by him.

[64]Transportation of the goods was generally arranged by suppliers. The suppliers retained ownership of the goods until they were delivered to Sweetmotion’s clients.

[65]Clients would generally be expected to pay Sweetmotion on delivery. If payment was not made then, the lorries would be instructed not to deliver. Exceptions were made for larger businesses that were big clients.

[66]There are no written contracts between Mr Jenkins and his suppliers. Mr Jenkins did not insure the goods – nor was he aware if his suppliers did.

Peralto

[67]On 10 February 2020 at 11:13 Peralto approach Mr Jenkins with the following email: “Dear Paul, Please excuse my direct method of contacting you, we met at trade show nec earlier last year. My name is Rebecca and I’m a Director at Peralto Ltd, an FMCG Trading house based in London. We are actively trading across FMCG in U.K and Europe and are looking to expand our counterparts. From our discussions at NEC I understand this may be of interest to you. Attached are all our company documents for records, please let us know if you would like regular offers. I look forward to hearing from you at your convenience and thank you in advance for your co-operation.” {997}

[68]Enclosed was a certificate of incorporation, a UK driving licence, an introduction letter and VAT certificate.

[69]The letter of introduction stated:

“Peralto Limited is a UK based consumer FMCG (fast moving consumable goods) company, specialising in sourcing and distributing goods within the UK. The core business facilitates trade between suppliers/manufacturers and retailers throughout Europe and the UK, as well as our network that spans the globe. Offering our customers a broad range of high quality products with efficiency and at competitive prices, we also help source the products your customers demand, at an amicable price. Advantages of working with Peralto Limited: • exceptional value • reliable service • experienced team • flexibility • access to a wide range of sort after high-end brands From beginning to end, whether it’s pricing, market insight or product range, we are confident that we can excavate the necessary requirements, to fortify an adequate corridor for your business solutions. Regards, Peralto Limited”

Advantages of working with Peralto Limited: Peralto Limited”

Advantages of working with Peralto Limited:

[70]The name on the driving licence was “Rebekah Nayomi Passley”. So “Rebekah” was spelt differently to “Rebecca” in the body of the email.

[71]On the same day as receiving this correspondence Sweetmotion bought 6,240 crates of 330mlx34 GB Coco Cola at a unit price of £7.45 (plus VAT), and so paid a total of £55,785.60 to Peralto.

[72]The invoices from Sweetmotion show 6,216 units being sold to a major soft-drinks wholesaler on the same day at a unit price of £7.50 (plus VAT). The difference in units sold is attributable to breakage. The total received by Sweetmotion was therefore £55,944. Thus while the turnover is high, Sweetmotion made a fairly modest profit (£158, less than 1 per cent of turnover) on the transaction.

[73]Mr Jenkins indicated he did not regard this rapid timeframe as significant, commenting in cross-examination:

“if you phoned me up today and said you had coke or Cadburys to sell, I would know off the top of my head who to call. I could sell them in a day.”

[74]The next day two further deals of similar value follow. Thereafter transactions continue with similar frequency.

CTADS

[75]On 15 April 2020 at 15:03 CTADS approach Mr Jenkins with the following email:

“Dear Paul, I hope that you are well. Further to my earlier conversation with Gary, attached are all the relevant documentation for CTADS LTD for your records. The sales team is currently preparing an offer for Duracell products which will be sent shortly. Please could you provide your company documentation and we look forward to hearing from and working with you. Kind regards Miss Ratidzo Mugadza Director CTADS LTD”

Kind regards Miss Ratidzo Mugadza Director CTADS LTD”

Director

[76]The reference to Gary is to a salesman Mr Jenkins had known for 20 years.

[77]The attached documentation was a certificate of incorporation; the UK driving licence of Miss Mugadza (which indicated her place of birth was Zimbabwe); a certificate of registration for VAT and an introduction letter. The introductory email was sent from a Gmail account, whereas the letter of introduction had an email address linked to a company web domain.

[78]The introduction letter states:

“Dear Client, CTADS Limited is a UK based consumer FMCG (fast moving consumable goods) company, that specialises in the sourcing and distribution of goods within the UK. The core business provides value for a clients by facilitating trade between suppliers/manufacturers and retailers throughout Europe and the UK, as well as our worldwide network. This company offers our customers a broad range of high quality products with efficiency and at competitive prices, we also help source the products your customers demand, at prices that promote repeat orders. Advantages of working with CTADS Limited: • client focus • exceptional value • reliable service • experienced team • flexibility • access to a wide range of sort after high-end brands From beginning to end, whether it’s pricing, market insight or product range, we are confident that we can excavate the necessary requirements, to fortify an adequate corridor for your business solutions. Regards, CTADS Limited”

Advantages of working with CTADS Limited: CTADS Limited”

Advantages of working with CTADS Limited:

[79]The VAT certificate gives a trade classification as: “46390 - NON-SPECIALISED WHOLESALE OF FOOD BERAGES AND TOBACCO.” [sic. our emphasis]

[80]It also provides an address in DN6 8DA of: “43 Ownston Road”

[81]There is no such road. The road given on the VAT1 form is “43 Owston Road” (without the “n”).

Third party payments

[82]In October 2020 there was a problem with paying into CTADS’s bank account. CTADS requested Sweetmotion to pay ST Bookly instead. The bank account into which the payments were made was located in Cyprus. There are 18 instances of payments in October 2020 and 16 instances of payments in December 2020. The total amount of the payments is £676,956.90.

[83]At the time Mr Jenkin’s only concern was that CTADS may later claim they had not been paid and demand further payment. He sought to mitigate this risk by obtaining a signed letter from the director of CTADS.

[84]In his meeting with HMRC on 12 March 2021 Mr Jenkins stated that there were only 2 or 3 such payments, and he could not remember to whom they were made. This is not so long after the date of the payments, so we find this error surprising. Even so, we do not consider this indicative of Mr Jenkins attempting to deceive HMRC. Rather, viewing the evidence in the round, we find it to be consistent with an extreme lack of interest in documentation and the practicalities of business. KCA

[85]On 28 April 2020 KCA emailed Mr Jenkins a certificate of incorporation; an application to register KCA; the memorandum and articles of association; and a VAT certificate.

[86]The VAT certificate names it “Kensington and Chelsea Associates” while the certificate of incorporation is for “Kensington & Chelsea Estates Limited”

[87]The name was later changed. While there is therefore objectively nothing concerning about this difference, it is a difference that Mr Jenkins did not spot and himself verify that there was no cause for concern. STB

[88]On 1 December 2020 at 16:53 Mr Jenkins was emailed by STB as follows:

“Dear Paul We would like to introduce ourselves and want to inquire with your company and business as well. Your details have been passed by Ctads Ltd for reasons I believe may have been explained. Suited to Business Limited (STB Limited), based in the UK, specialises in meeting the needs of business customers who operate in the wholesale and retail markets. Our sales division specialises in: • Fast Moving Consumer Goods: Soft drinks, Cosmetics, Confectionery etc We are proud to have assembled the team at STB whom are focused on meeting your needs by offering a quality service that is founded on reliability and competitive pricing. Our approach to business is based on building long term relationships based on fair, ethical and sustainable practices. Both suppliers are customers are required to have considered approach in relation to the environment and ensuring that the supply chain is free from any form of human slavery. We look forward to working with you provided that you are able to pass the required due diligence checks. Kind regards, Best Regards Chantelle Pinto Director Suited To Business Limited”

Best Regards Chantelle Pinto Director Suited To Business Limited”

Director

[89]The email attaches a certificate of incorporation; a certificate of registration for VAT; banking details and copy of the passport of the director. It also encloses an introduction letter (similarly worded to the cover email) dated 18 November 2020. The introduction letter has a Mayfair address.

[90]The VAT certificate gives a trade classification as: “46390 - NON-SPECIALISED WHOLESALE OF FOOD BERAGES AND TOBACCO.” [sic. our emphasis]

[91]The passport copy is a copy of a copy. It is a photograph of a printout of a scan of the original passport. That is apparent from it being on a piece of white paper that is photographed on a work-surface and there are no edges of passport pages showing. Mr Jenkins admitted this to be the case when it was put to him at the hearing, but had not noticed it before then.

[92]When, in cross-examination, Mr Jenkins was challenged about the lack of commerciality of one supplier recommending another, he commented:

“if there was collusion going on I would not have sent the email [to HMRC]. I think CTADS had some dispute going on between themselves and they said they were unable to continue the supply of goods, these were a separate company and someone within CTADS passed this on to them and told them to get in touch with me.”

[93]However, he was unable to recall the detail of this conversation; and could not remember who the director of STB was.

[94]Also on 1 December, despite the initial contact being made at 16:53 on the same day, Sweetmotion entered into two transactions with STB, for purchases of £40,942.72 and £56,676.15.

Contact with HMRC

[95]In 2020, Sweetmotion came to the attention of HMRC as it had been noted that it was supplying a company called Pallet Price Limited which was being monitored by HMRC. HMRC first contacted Sweetmotion on 8 December 2020, with questions concerning the business. As that email had not been answered, on 22 December HMRC reached out copying-in Sweetmotion’s accountant. The accountant forward it to Mr Jenkins on 29 December. Mr Jenkins replied the following day, noting that the email had been sent to an account he generally did not use. Mr Jenkins replied to Officer Joanne Bannerman on 31 December 2020, giving full answers to her questions. {444}{449}

[96]Following further email enquiries, on 6 January Officer Bannerman requested a telephone meeting with Mr Jenkins to “get more insight”. Mr Jenkins responded on 13 January and a meeting was arranged for 18 January. {463}

[97]HMRC’s internal note of the telephone meeting on 18 January 2021 shows that the business was discussed in detail, and records the following under the heading of “Due diligence”:

“He searches the internet for the directors and uses a website Endol that gives some company information. I explained how to access Companies House and to look for accounts, how to check what other directorships a director had, also suggested looking at shareholdings to see who is the majority shareholder. He asks around his contacts about potential new business – have they traded with them, what are they like, has anyone heard of them. He asks for company registration number, VAT number, director’s name and address and a utility bill. I said there is more DD he could do - told him about HMRC’s VAT checker; this tells you the name of the company that has the VAT number being input. I said I would send him the link to the gov.uk webpage. I said he could look at numbers of businesses held by a director – may want to think twice about becoming involved with one who had several businesses they made insolvent. I said I would send him 2 leaflets [726 and How to spot missing trader fraud] with more guidance on DD. I said DD was not just something HMRC wants; it should be done to protect a business. I went on the explain about Kittel and MTIC fraud in general – we can deny input tax (if another in the chain goes missing without paying their VAT) if DD was so poor that it should have been clear that something about the deal wasn’t right. If someone has done all they reasonably could to avoid being caught up then this wouldn’t apply. I mentioned directors have been jailed for committing MTIC fraud. Other things to be on the look out for – goods not insured, new companies with no background in the trade able to acquire goods for cheaper than well known experienced traders, companies whose turnover increases greatly very quickly, to which he interjected that’s what his business had done.”

[98]Under the heading “Conclusion/Credibility” the notes states:

“Due to his business methods, he is at risk of becoming involved in MTIC fraud. It may be beneficial to put the company on monitoring.”

[99]Immediately following the meeting Officer Bannerman emailed Mr Jenkins as follows:

“Thanks for speaking with me this morning. As mentioned, here are the links. This one is an overview of the fraud: https://www.gov.uk/government/publications/vat-missing-trader-fraud The useful due diligence guidance starts at section 6 – in the contents you can click on section 6 and it will go straight to it. https://www.gov.uk/guidance/joint-and-several-liability-for-unpaid-vat-notice-726 VAT records keeping: https://www.gov.uk/vat-record-keeping check a UK VAT number: https://www.gov.uk/check-uk-vat-number I will contact you again once I have the dropbox information.”

This one is an overview of the fraud: https://www.gov.uk/government/publications/vat-missing-trader-fraud https://www.gov.uk/guidance/joint-and-several-liability-for-unpaid-vat-notice-726 VAT records keeping: https://www.gov.uk/vat-record-keeping check a UK VAT number: https://www.gov.uk/check-uk-vat-number I will contact you again once I have the dropbox information.”

https://www.gov.uk/check-uk-vat-number

[100]In cross-examination Mr Jenkins was asked whether he had read section 6 of Notice 726. He initially stated that:

“I do not believe I looked at it in any depth, no.”

However, once he had been taken to the section and questioned about the similarities between the “red flags” highlighted within that section and his own deals, he was again asked whether he had looked at the link when HMRC had sent it. He then replied: “no”.

[101]When Mr Jenkins was asked why he had not looked at the information properly he replied that this was because:

“I believed my checks were going above and beyond…that I was doing all checks and did not believe anyone I was dealing with was problematic. My overconfidence meant that I did not review this in as much detail as I should have done. I genuinely believed I was doing more than necessary.”

[102]On 26 February 2021 Officer Percival wrote to Sweetmotion to request a meeting. The letter stated: {505} “HM Revenue and Customs is concerned that your business may be at risk of involvement in supply chains that are connected to fraud… To help both your business and HMRC, I would like to arrange a visit to your business premises to discuss your business activities and inspect your VAT records. I will contact you shortly to agree a mutually convenient time.”

[103]The letter noted that arrangements would be made for HMRC to be provided with certain records on a monthly basis. The letter also stated:

“You may already be verifying whether or not new or potential customers and suppliers are currently VAT registered. In future could you please direct all requests for VAT registration verifications by e-mail to validationrequestssi.hmrc@hmrc.gsi.gov.uk. Please register for this by completing the attached authority template and emailing it to the same address. Further information about this service is included in an enclosure with this letter. For further information on VAT supply chain fraud and how to avoid being caught up in it please see our leaflet ‘How to Spot Missing Trader VAT Fraud’ on the GOV.UK website. You may also find it useful to read Public Notice 726 ‘Joint and several liability for unpaid VAT’ also on GOV.UK.”

[104]On 10 March Mr Jenkins emailed Officer Percival with the names and contact details of the four suppliers that he used. The email also states:

“Sweetmotion have on file the following information for each of the companies listed • Names of Directors and Passport or Driving Licence • Copy of VAT Certificate • Copy of Incorporation • Letter of Introduction • Utility Bill in Company name • Address of Offices Before any supplies or orders placed each company was checked on google site to see details of company were registered and that names matched.”

[105]The remote meeting took place on 12 March 2021. The meeting discussed issues including due diligence, third-party payments and lack of written contracts. The recorded exchanges include:

“AP – Did you receive and read Notice 726? PJ – Yes – I have read through it, it seems quite frightening I know HMRC come out and have meetings with people and it would be good to come out and meet and get to know people. AL – We did do that but we are not doing that at the minute due to COVID. The guidance can be detailed but it is to make people aware of the consequences of the decisions they make. There are industries susceptible to fraud and we can give people the knowledge of what to look out for and if they are currently caught up in a fraudulent chain then we can advise how to get out of it. AP – Do you purchase on credit terms? PJ – It depends on the customer that I will sell on to. Once it’s delivered, the invoice is immediately payable, some customers have kept to that and some don’t. Some pay a day late etc so I manage the situation with my supplier. [P] are a nightmare to deal with. AP – Do you offer credit facilitates? PJ – 2 cash and carry’s I supply guarantee they will pay me in 7 days but most is on arrival after inspection AP – Do you undertake credit worthiness checks? PJ – No, I sell to people I know or have been recommended. I check on endol also before I make a decision to supply. AP – Do you offer any discounts? PJ – No the price is the price AP – Do you have a Retention of Title clause? PJ – No its not on my invoices, I should start to put it on them. AP – Do you make or receive 3rd party payments? PJ – No its all direct, at one point a customer had a problem with their bank so I paid it to a different account, it was 2 or 3 payments, but they went back to the original bank account. I can’t remember who it was so I will have to check. … AP – Has your Due Diligence changed? PJ – What Joanne suggested I do I already carried out, I never used HMRC VAT checker but I do that now. I googled companies, checked website etc I should have been using HMRC VAT checker … AL – Do you have copies of Companies House and VAT certificates? PJ – Yes AL – Do you have copies of letters of introduction? PJ – Yes AL – What level of credit checks do you undertake? PJ – None AL – Have you met with a director or anyone other person from a company? PJ – Yes AL – Have you visited the principal place of business? PJ – I would have in the past and I have done with some of them – STB I am planning to go and see their premises in London. I have already visited Peralto. Names on the e mail I supplied is the point of contact with who I trade with. The 4 suppliers I sent you is all I have bought from, I still use them today I don’t buy from anyone else. Actually, I only deal with one of them now STB in London. The other 3 I don’t, I can’t remember the situation but one of them I fell out with because they weren’t delivering when they should have been, that was Kensington and Chelsea associate. The company CTAD prices weren’t good. Peralto were relocating so I stopped trading with them. I am looking for more suppliers to deal with. AP – is there still a relationship there with any of them?”

AP – Do you purchase on credit terms? AP – Do you offer credit facilitates? AP – Do you undertake credit worthiness checks? AP – Do you offer any discounts? PJ – No the price is the price AP – Do you have a Retention of Title clause? AP – Do you make or receive 3rd party payments? AP – Has your Due Diligence changed? AL – Do you have copies of Companies House and VAT certificates? PJ – Yes AL – Do you have copies of letters of introduction? PJ – Yes AL – What level of credit checks do you undertake? PJ – None AL – Have you met with a director or anyone other person from a company? PJ – Yes AL – Have you visited the principal place of business? AP – is there still a relationship there with any of them?”

AL – Have you visited the principal place of business?

[106]At no stage of this conversation is it suggested to Mr Jenkins that the due diligence and other checks he is taking are inadequate. While he is, for example, asked about credit checks and written contracts there is no suggestion that they might be a good idea when he says that he does not do them.

[107]Mr Jenkins presents as highly cooperative. He says he has read Notice 726 and has clearly given it some thought as he says it is “quite frightening”.

[108]HMRC’s stated purpose is to “give people the knowledge of what to look out for and if they are currently caught up in a fraudulent chain then we can advise how to get out of it”.

[109]Although in this conversation Mr Jenkins stated he had visited Peralto in cross-examination he admitted that he had not visited the principal place of business or met with the director. We find it more likely than not that he never visited the principal place of business or met with the director.

[110]On 15 March 2021 HMRC wrote to Sweetmotion requesting information. A link was again provided to Public Notice 726 and Mr Jenkins was asked to confirm he understood the contents of the notice. On the same day Mr Jenkins responded with bank statements and the VAT return. On 7 April Mr Jenkins provided various invoices from Sweetmotion.

[111]The earliest suggestion that Sweetmotion may have been involved in a fraudulent supply chain was on 12-13 May 2021. On 12 May 2021 Officer Percival wrote to Mr Jenkins:

“I am sending you this email and the attachments as I have been reviewing some of the returns and other information you have sent me, and I have found some issues. When I find an issue with a return, I must provide you with the attached factsheet CC/FS9 – Human Rights Act before discussing the issues with you so you are aware of your rights under this Act. Therefore, can you please read the attached factsheet and reply with your confirmation that you have read and understood its content. When an issue is uncovered in a return, I must also consider the behaviour which led to the inaccuracy. I have also attached the factsheet CC/FS7a – Penalties for inaccuracies. This is for your reference so please read this factsheet and we can discuss anything which is not clear on our call next Thursday. I will be happy to discuss the matter further before then, but I will require your confirmation regarding the Human Rights factsheet before that. If I do not receive your confirmation regarding the factsheet by the time of our meeting next Thursday, I will assume you have read and understood it’s content.”

[112]Then on 13 May 2021Officer Percival wrote to Mr Jenkins:

“As you will be aware from reading section 6 of Public Notice 726 which you have been supplied with, there are certain things to look out for when deciding whether to engage with certain customers or suppliers. As I also explained to you in our first meeting, and I believe Officer Bannerman also discussed with you at one point, the sector you trade in is, unfortunately, susceptible to fraudulent behaviour so I hope the conversations we have can educate you so you can protect your business going forward. The specific issue I have uncovered is that you have claimed Input Tax based on purchases made by Sweetmotion Ltd from suppliers you have engaged with. At different points, the suppliers in question had not been VAT Registered when these supplies were made to you, therefore, the Input tax you have claimed was not, in fact, Input Tax. As your suppliers were not registered for VAT at the point at which the supplies were made, they could not charge VAT on their supplies to you.”

[113]On 20 May 2021 Officer Percival had a telephone meeting with Mr Jenkins. At that meeting, amongst other things, it was explained that CTAD and Peralto had made supplies after they were deregistered.

[114]At no stage has HMRC ever sent a veto letter to Sweetmotion with regard to any off the four defaulting suppliers.

Ceasing trading

[115]Sweetmotion ceased trading in April 2021, due to concerns with the letters being received from HMRC.

Knowledge

[116]We disagree with HMRC who say that by not reading the information provided on 18 January 2020 this indicates Sweetmotion knew the transactions were connected with fraud. We consider the more plausible explanation is that Mr Jenkins mistakenly thought the due diligence he was doing was adequate.

[117]HMRC rightly say that being supplied consecutively by four defaulting traders, who account for 100% of all supplies between them, is a strong indicator of contrivance. However, it does not follow that Sweetmotion was aware. Fraudsters can be manipulative and excel in gaining peoples’ confidence and trust. Mr Jenkins may as plausibly have falen victim to fraudsters who are capable of such orchestration. We do not consider it to be an indicator of knowledge in this case.

[118]We agree it is commercially foolish to trade, essentially sequentially, with only four suppliers – so often having only one supplier at any time. In cross examination Mr Jenkins explained:

“I was going to start going to others while I was growing but at that moment in time made sense to me to just deal with one person it made it easy for me as long as I could get stock and deliver… For me at that time the amount of time I had in the day I did not want multiple people supplying me, it would make it harder for me and in my mind that system was working.”

[119]He also explained at the time he had a “PAYE job” and was looking to do things simply so that it could be combined with his employment, rather than introducing complications. We accept his explanation. While this suggests naivety by Mr Jenkins it is not an indication of fraud.

[120]Likewise we do not consider the absence of written contracts between Sweetmotion and its suppliers or the lack of insurance indicators of Mr Jenkin’s knowledge of fraud. The importance of written contracts was reduced by the payments being made on delivery. Similarly, the lack of Mr Jenkin’s interest in insurance by his suppliers is explained by the back-to-back nature of the transactions, where Sweetmotion never took possession of the goods and only paid for them once they were delivered to its customers.

[121]We consider that the email from STB saying it was recommended by CTADS was not an indicator of knowledge. This seems more to be an indicator of something going on that Mr Jenkins should have picked up on.

[122]Similarly, we do not consider that Mr Jenkin’s comment that there were only 2-3 third party payments shows him trying to “deflect” HMRC: rather the comment shows a lack of attention and care to detail.

[123]We accept that the rapid trading with Peralto and STB on the same day that Sweetmotion was approached could be an indicator of knowledge, potentially showing pre-planned trading. However such rapid trading is not in itself sufficient to show knowledge, it may just show foolhardiness.

[124]We also take account of the unchallenged witness statement of Mr Gaffney that refers to Mr Jenkins as someone of high integrity and someone who would not knowingly proceed with anything if he thought it was incorrect, improper, or non-compliant.

[125]Viewing all the evidence in the round, we find that Mr Jenkins did not know the transactions were connected with VAT fraud.

Should Have Known

[126]There are several factors that should have pointed Sweetmotion to realise that something untoward was going on. These include:(1) STB was referred by CTADS – the introductory email of 1 December 2020 states “Your details have been passed by CTADS Ltd for reasons I believe may have been explained.”. It is not commercial for one supplier to refer another.

(2) In October and December 2020 a total of 34 third-party payments were made. At the time Mr Jenkins realised these were commercially problematic, although he did not then understand the connection with VAT fraud.

(3) We accept the rapid increase in turnover was associated with a change in the nature of the trade. Nonetheless, we consider that a business able to command such a high turnover, almost instantaneously from the commencement of its trade, should raise red flags that something untoward is going on.

(4) Whilst undue emphasis should not be placed on due diligence, we accept HMRC’s submission that if Mr Jenkins had done reasonable due diligence he would have noticed the following: (a) checks at Companies House would have shown: (i) Peralto was only incorporated on 11 March 2019, which should have raised a red flag; (ii) CTADS was a dormant company, which had submitted accounts as a dormant company for the years ending 2011-2019. This would have raised concerns as to how it could fund such transactions; (iii) KCA prepared micro-entity accounts, and while there is very limited information, it is apparent from the balance sheet that the creditors have jumped from £75,300 in 2019 to £1,058,822 in 2020; and the net asset position shows a deficiency of (£1,025,574); (iv) STB was incorporated on 28 July 2020. (b) a Google search on CTADS would have indicated that it had no presence at its alleged principal place of business, as only a retail shop is on view.

[127]Further, if Mr Jenkins had properly applied his mind to due diligence information within his possession, he would have seen red flags, specifically:(1) the introductory communications from Peralto spelt the first name of the director in different ways. Mr Jenkins admitted he had not noticed this, but suggested that if he had he would have placed no weight on it because it was plainly someone with a foreign name trying to anglicise it in their letter. We disagree, it raises concerns viewed in the overall context of the fact pattern, where there are other red flags;

(2) the introductory letter for Peralto contains unusual language:

“excavate the necessary requirements, to fortify an adequate corridor for your business solutions”

. It is repeated in the introductory letter for CTADS, which is almost identical. Such similarity between independent businesses itself raises red flags. The introductory letter for STB is also quite similar. (3) Mr Jenkins did not meet any of the directors. COVID restrictions may have prevented him meeting some directors, they would not have prevented him meeting the director of Peralto as restrictions were only introduced on 23 March 2021. (4) The introductory email from CTADS was sent from a Gmail account, whereas the letter of introduction had an email address linked to a company web domain. (5) The VAT certificates for both CTADS and STB contained a misspelling of the word “beverages” – spelling it “berages”. Also the address was misspelt on the CTADS certificate. (6) The passport of the director of STB is a copy of a copy.

[128]These matters, viewed together, should have raised red flags that something serious was wrong. We accept they did not raise red flags for Mr Jenkins. The reasons for this are clear to us from an emotional account he gave towards the end of cross-examination on the second day of the hearing. He explained that he thought this would be a long-term business, which he could expand owning his own warehouses and start servicing smaller customers from them. He was excited. He had gone from being high up in a company, with lots of people working for him. He had his family and had become unwell. Business had stopped with the pandemic but he had seemed to find something. He thought of looking at other suppliers, one in Poland and one in Spain, but the suppliers he had made it easy, and he didn’t want to complicate things. He was consumed by hope for the possibilities of what could be. He thought the due diligence he had collected was sufficient. Not all customers accepted the prices he was offering the goods at, so he did not consider the prices too good to be true. We accept Mr Jenkins explanation that he did not know, he was blinded by the hope of being at the start of an exciting business opportunity that would change his life, but we consider from these factors he should have been aware that something was seriously wrong.

[129]That is not sufficient for us to dismiss the appeal. HMRC accept that the known or should have known test relates specifically to VAT fraud.

[130]This is an unusual case, because it is only well into the fraud that HMRC starts educating Mr Jenkins about missing trader fraud. On his own account Mr Jenkins was concerned about being defrauded financially – for example his explanation of wanting a written assurance from the directors to make third-party payments. However, initially he was not aware of VAT fraud.

[131]We consider that in relation to any trades on or after 19 January 2021 Mr Jenkins should have been aware. By then he had the meeting on 18 January 2021, at which some of the hallmarks of missing trader fraud were explained. The note records that when HMRC explained one such hallmark was companies whose turnover increases greatly very quickly, Mr Jenkins interjected that’s what his business had done. HMRC also sent him the factsheet on How to spot missing trader VAT fraud and the Public Notice 726, referring him to section 6. While Public Notice 726 relates to “specified goods” (broadly certain electronic equipment, including phones and computers) and the goods Sweetmotion sold were not specified goods, we do not consider this significant, as he was referred to the section that concerns “how to make sure the integrity of your supply chain”, which is equally relevant to him. He was also referred to the factsheet on How to spot missing trader VAT fraud which is of general application.

[132]We acknowledge that HMRC sent Sweetmotion no veto letters. We further acknowledge that despite Mr Jenkins telling HMRC who Sweetmotion’s suppliers were on 10 March 2021 HMRC did not raise any issues with the supply chain until 12-13 May 2021. This was despite regular contact (including meetings) in this period. Indeed, this contradicts the stated position of HMRC at the meetings as being there to help. For example, at the meeting on 12 March Officer Percival comments:

“There are industries susceptible to fraud and we can give people the knowledge of what to look out for and if they are currently caught up in a fraudulent chain then we can advise how to get out of it.”

[133]Similarly on 13 May 2021 he indicated that the purpose of his conversations was to:

“educate you so you can protect your business going forward”

[134]Yet, despite knowing who Sweetmotion’s suppliers were, HMRC did not raise issues.

[135]We find such conduct by HMRC troubling and inexplicable. The relevant officers have since left HMRC and so we did not have the benefit of an explanation from them. We can well understand that Mr Jenkins would be angry and upset that HMRC said nothing for so long. However that does not extricate Sweetmotion. The relevant question is still whether Sweetmotion should have known that the transactions were connected with VAT fraud. For the reasons given, we find they should have from 19 January 2021.

[136]We accept HMRC’s inaction after Sweetmotion told HMRC the identity of its suppliers will have given Sweetmotion some comfort. Even so the pointers that something was wrong were so strong that, after they received education from HMRC in January 2021, Sweetmotion should have known the transactions were connected with fraud.

[137]Also, we specifically place no weight on the fact that Sweetmotion did not redo due diligence. A taxpayer can expect HMRC to send veto letters. Indeed, even the officers who gave evidence conceded that the idea of doing monthly checks on VAT registration was unrealistic.

Kittel Decision

[138]It follows that input tax is denied, but only in relation to transactions on or after 19 January 2021.

Mitigation of Penalty

[139]It is common ground that if the denial is upheld then the Company Penalty follows.

[140]Given the very clear cooperation given by Sweetmotion and Mr Jenkins with HMRC we consider it proper to mitigate the penalty. Such cooperation is very clear to us looking at the chain of emails where meetings are arranged. Mr Jenkins was very keen to meet with HMRC. His behaviour in those meetings is forthcoming and cooperative.

[141]In the circumstances we consider a 25% reduction of the penalty appropriate. HMRC will also need to recalculate the penalty so it only relates to transactions on or after 19 January 2021.

Right to apply for permission to appeal

[142]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release date: 05 May 2026